April 18 - Don't Meddle With Medicare's Prescription Drug Benefit

Thursday, April 20, 2017 - 10:30am

By Joel White

Don't Meddle With Medicare's Prescription Drug Benefit
By Joel White

Seema Verma, the new administrator of the Centers for Medicare and Medicaid Services, recently praised Medicare's prescription drug benefit for giving seniors access to affordable medicines, saying she was "thankful" for the program.

There's a lot to be thankful for. Medicare Part D, as the drug benefit is known, provides seniors with huge discounts on medicines, enabling them to live healthier, longer lives. That's good news for the more than 41 million Americans who currently rely on the program for prescription drug coverage.

Nevertheless, Rep. Elijah Cummings, Sen. Bernie Sanders, and some other members of Congress believe the program isn't cost-effective enough. Current law says the government can't meddle in price negotiations. Many wrongly assume that means there are no price negotiations, which is not true. Discounts are negotiated every day in Part D, but not by the government, by the private sector. To achieve greater savings, they've proposed letting the government "negotiate" drug prices.

The policy change would be a disaster. Government wouldn't negotiate -- it would simply set prices and refuse to cover medicines it deemed too expensive. That would deprive seniors of life-sustaining medications.

Part D's success is driven by market competition, not government control. Private insurers negotiate with drug firms to secure discounts -- an average of 35 -- off the list price of medicines.

Plans extract big discounts from drug makers by threatening to steer patients to a rival company's drug. Consider what happened with a new class of hepatitis C treatments, which cure the disease in more than 90 percent of patients with few side effects. When only one treatment was available, plans providers negotiated rebates that shaved 22 percent off the drug's list price.

But once a competing drug was introduced, plans negotiated a 46 percent average rebate.

Insurers transfer savings like these to consumers in the form of lower plan premiums, co-pays, and deductibles -- the Part D law requires it. Seniors can choose whichever Part D plans -- ranging from basic, no-frills options to extremely generous coverage -- suit them best.

There's a strong incentive for insurers to keep costs low. If they don't, seniors can jump ship and enroll in a rival insurer's Part D plan. Because of this competition, total costs for Part D came in $349 billion lower than the Congressional Budget Office's cost projections for 2004-2013.

Which other government program comes in hundreds of billions under budget?

If the government meddles with what's in patients' medicine cabinets, it will jeopardize all these gains.

As the CBO has made clear, the government wouldn't be able to negotiate prices that are lower than what private insurers already get. To keep costs down, the government might ration access to medicines by establishing a formulary -- a list that dictates which drugs are covered, and at which co-payment levels.

If the government were to establish a formulary, it would be one-size-fits-all. We've seen this happen at the Department of Veterans Affairs. The VA's formulary doesn't cover one-fifth of the top 200 most commonly prescribed Medicare Part D drugs, according to a 2015 study by the research firm Avalere Health.

Part D largely owes its success to the free-market principles of choice and competition. Let's hope Ms. Verma defends those principles as the drug cost debate heats up. Getting the government more involved in Part D plans would be a step backwards for patients and taxpayers.